3 financial performance metrics every retailer should measure
Retail is a blend of art and science. Sometimes you need to go on instinct, sometimes you need to look at the numbers.
Independent retailers must measure financial metrics to understand where they’re at and how they can progress.
Measuring financial metrics is crucial to making more money. It gives you the hard facts about your business’s financial performance. Without this information, you can only guess what steps you need to take to generate more profit. You may as well lick your finger and stick it in the wind.
Now that we’ve established that measuring metrics is something that you should be doing if you want to make more money (which retailer doesn’t?), you will probably be wondering where to start. There are thousands of financial metrics you could track, but as a busy business owner, you can’t possibly keep tabs on all of them. We want to make it easier for you to manage your business, which is why we’ve selected the top three financial metrics you should be measuring. We explain what they are and why they’re so important.
So, if you want to get a better grasp of your financial performance and boost your profitability without spending hours mulling over spreadsheets, give these three metrics a try.
1. Total sales
The total sales metric, otherwise known as gross sales, is arguably the most important metric for retailers. It allows them to answer the question “How well are my products are selling?”.
It also enables retailers to project future sales — something which is especially important to small retailers, who often look to secure investment in the early stages of their business venture. When trying to secure an investment, small retailers need to show their sales performance so investors can see whether the offering being sold is market viable and whether the sales trends are increasing or declining.
Whether you want an overview of your sales performance or you’re seeking investment, it’s important to look at your total sales figures across a number of years, where possible. Month to month sales can be misleading as they’re heavily dependent on external factors out of your control, such as national holidays and seasons. If you have the historical data to compare yearly total sales, you can get a more accurate overview of how your business and products have progressed over time and predict, based on past trends, how many sales you will make in the coming years.
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2. Gross margin
Unlike total sales which only shows you your revenue stream from the products you sell, gross margin measures the profitability of your inventory. This metric doesn’t include costs outside of your inventory, such as operating costs such as wages, rent or marketing campaigns. This metric is important because it allows you to see how well your inventory is performing.
To calculate your gross margin, you need to subtract the total cost of goods from sales generated and then divide this number by your total sales to get the gross margin percentage. Here’s the formula you need:
In the example below, over the course of a year fictional company Kitt’sKloset spent $250,000 on goods and generated $500,000 in sales. Cost of goods subtracted from total sales is $250,000 ($500,000 – $250,000). Gross margin percentage is this number divided by sales ($250,000 – $500,000) and multiplied by 100. In this case, it’s 50% (0.5 x 100).
3. Net margin
Many retailers start a business to turn their passion into profit. Many of our customers are examples of real-life success stories who have managed to achieve this. Take Two Monkeys in Australia. Before launching their bike shop in Alexandria, the two founders were cycling aficionados who wanted to bring the local biking community closer together. The profits they made from their shop have allowed them to open a second location in Sydney. To be able to expand their business, they firstly needed to know how much profit they were making.
Net margin, also called profit margin, indicates the overall profitability of your business. You need to track this metric to be able to make future decisions based on positive revenue, or the cash actually available to you minus all your expenses.
Net margin not only takes into consideration inventory costs, but also all your outgoing costs we mentioned earlier, such as wages, rent and other operating costs.
A few things to keep in mind:
• You can usually get your total sales and expenses in a Profit and Loss Statement from your accountant.
• You should calculate profit margins after sales tax or VAT. Remember, this metric takes into account all incoming and outgoing cash.
Here’s the formula you need to calculate net margin:
There’s no doubt about it. Small business owners need to measure their financial data in order to progress their businesses. Measuring metrics is an essential part of this process. They give you insight into your financial performance that you can’t get anywhere else. As long as you track your incomings and outgoings (which, let’s face it, any business owner should), you’ve got the information you need at your fingertips to calculate your sales and profitability. Only then can you decide on your next move.